KPMG’s fraud survey reveals that fraud hits nearly one in two companies in Malaysia

49% of Malaysian companies surveyed experiencing at least one incident of fraud

11 January 2010 – Fraud continues to be a serious threat within corporate Malaysia with 49% of Malaysian companies surveyed experiencing at least one incident of fraud.

47% of the respondents who had experienced fraud within their organization disclosed that the total losses suffered during the survey period was RM63.95 million while the remaining 53% were unsure of the amount. A total of 714 separate cases of fraud were reported by 84% of the respondents who had experienced fraud within their organization while the remaining 16% were unsure of the number of fraud incidents. This is according to the KPMG Malaysia Fraud Survey Report 2009 where questionnaires were sent to all companies listed on Bursa Malaysia and a selection of Malaysia’s top 1,000 ranked companies.

The KPMG survey calls for a commitment to tackle fraud incidents robustly in an environment underpinned by a culture of compliance, and an appreciation of the values of integrity and honesty.

According to Tan Kim Chuan, Head of KPMG Forensic Malaysia, “the cost of fraud reported could be far more than what was reported as not all respondents disclosed information on the number of fraud incidences and/or the value of fraud detected”.

42% of the respondents who reported fraud came from organizations with manufacturing, construction and engineering or consumer products as the main lines of business.

The survey also revealed that the risk of fraud is expected to increase as a result of the current financial crisis with 78% of the respondents saying that financial statement fraud will also rise.

“In a time of fragile economic conditions, managers and employees face even tougher challenges than ever before in the form of personal, financial and workplace pressures coupled by fear and uncertainty. To some extent, these pressures can build on an individual, prompting him or her to commit fraud” said Tan Kim Chuan.

The report further pointed out that the threat of fraud comes mostly from within the organization with internally perpetrated fraud by management and non-management employees accounted for 88% of the total reported fraud value of over RM60 million.

Greed/ lifestyle (62%) and personal financial pressure (39%) were cited as the two most common motivations for fraud. Theft of cash (39%), theft of inventory (31%), fraudulent expense claims (26%) followed by kickbacks (25%) were the most common types of fraud perpetrated.

Theft of physical assets appeared to be a popular category of fraud perpetrated among non-management level employees and external parties whilst management level employees are more prone to commit theft of funds (outgoing).

The most significant method used to detect fraud was internal control procedures followed by notification by employee, internal audit review, notification by customer/ supplier and anonymous letter/ informant/ whistleblower.

Conversely, poor internal controls (56%) remained as the major factor allowing major frauds to occur followed by collusion between employees and third party (45%) and poor ethical practices (39%).

The most common steps taken by companies to mitigate the risks of fraud are reviewing and/or improving internal controls (93%), establishing a corporate code of conduct/ethics (74%), increased role of audit committee (63%) and pre-employment screening (62%).

Most alarmingly 39% of respondents who had experienced fraud had ignored relevant fraud “red flags” (fraud early warning signs). A mere 22% of respondents felt that their employees were adequately trained to recognize fraud “red- flags”.

62% of organizations are providing a means for employees to report allegations and incidents of fraud and unethical conduct of which only 49% said that they offered anonymous reporting to employees. Only 54% percent of respondents believed that their organization’s anti fraud policies, procedures and controls are adequate to prevent, detect, and respond to fraud incidences.

The most common occurrence of unethical behavior experienced by organizations was conflict of interest (49%) followed by falsely claiming sick leave or absenteeism (46%) and conducting business transactions in a manner which derives an unwarranted personal advantage (32%).

The report also provides amongst others a snapshot of the perception of fraud in the region and an insight into the issues faced by organizations, how businesses are affected by fraud, the trend of fraudulent activities, likely perpetrators of fraud and the various measures that businesses are taking to prevent and detect fraud.

“With the increase in the number of complex business transactions combined with the lack of effective monitoring, frauds are a real time threat to most corporations in Malaysia. It comes as a surprise that even the larger companies operating in Malaysia do not have adequate risk management strategies,” said Tan Kim Chuan.